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I was recently asked, “What if I’m not happy with the Realtor I’ve been working with and find a house I like at someone’s open house? Do I have to use the first Realtor to make an offer?”

Technically, you can choose any agent to represent you in a purchase. If an agent has been showing you homes and you happen to walk into someone else’s open house, you are in most cases free to write an offer with that “new” agent, eliminating the agent you’d been working with. They would not receive any compensation at all in that case.

It’s not quite as simple as that, however. Real estate agents do a great deal of work behind the scenes on their buyers’ behalf. They don’t simply show houses at random. A real estate agent may often spend dozens of hours working for each buyer before making a successful offer for them. When a prospective buyer doesn’t ultimately purchase a home through them, they have been working for free.

This is the nature of the real estate business; all agents work “on spec,” and not every prospect buys a home from them.

But if you are unhappy with the Realtor you’ve been working with, you should tell them what you expect, as a matter of courtesy. If they are not showing you the kinds of homes you are interested in (assuming your expectations are reasonable), you should tell them in as much detail as you can why each house they are showing you isn’t right. If they still fail to meet your expectations, just tell them that you are changing your plans and won’t be working with them any longer. If they have not been returning your calls, emails or texts within a reasonable time, you should still tell them you won’t be working with them any longer.

Doing this—even if they have fallen far short of your expectations—you’ll know that you’re being a good human being.

There is at least one legal aspect to looking at properties with one Realtor and using another to purchase a property previously shown by the first. The agent who first showed you the property would be considered the “procuring cause” of the sale, and would be entitled to a commission. These kinds of disputes between Realtors are often settled at the level of the local Associations through arbitration.

The best agents are scrupulously aware of the ethical aspects of their business. When a buyer visits an open house, the agent on-site, will often ask, “Are you working with an agent?” If the answer is yes, the hosting agent will work with the buyer’s agent if the buyer wants to make an offer. Agents who “poach” the clients of others often derelict in other aspects of real estate practice, as well.
Many of the best real estate agents work with buyers on a Buyer Representation Agreement—Exclusive basis. Agents refer to this as a “BRE.” When you sign this agreement, you agree to work exclusively with that agent during the term specified. It is the buyer-side equivalent to a listing agreement between seller and agent to sell a property.

Agreeing to a BRE can be a very good strategy for a buyer. Since real estate agents spend a great deal of time (and money) working “on spec,” entering into an exclusive arrangement like this tells your agent that you are serious and have done your own due diligence in selecting them to represent you as a buyer. If you are a casual would-be be buyer (what used to be called a “looky-loo” or “tire kicker,” don’t enter into this kind of agreement. But if you are not a serious buyer, don’t waste an agent’s time asking them to research the market for you and show you homes that you’re not likely to buy. Walk into open houses on weekends, and if you happen to fall in love with one, ask the agent hosting it to write an offer for you if you’re inclined.

But don’t waste agents’ time if they are not performing to your satisfaction and don’t respond to your feedback and guidance.

It’s that “being a good human being” thing.

The Federal Reserve announced its widely-expected .25% rate hike today. Does this mean mortgage rates will go up?

Actually, no; in fact, mortgage rates improved a bit today, as they have been doing consistently Since November 13.

To make sense of this, you should first know that the Federal Reserve (specifically the Fed Open Market Committee, or FOMC) directly influences only one interest rate: The Federal Funds  Rate. This is the interest rate banks charge when they lend money overnight to other banks. The FOMC typically meets eight times a year to determine the Federal Funds “Target Rate.”

Metaphor Alert!

Think of the Federal Funds rate as being similar to the accelerator and the brake on a car. The car is the economy. When the Fed decides that the economy needs to speed up, they press the accelerator by lowering the Federal Funds rate. Changing this rate affects the Prime Rate, which floats 3% above the Federal Funds Rate. Lowering rates makes it cheaper for business and consumers to borrow money, stimulating the economy.

The Fed walks a sort of financial tightrope. If the cost of money is too low (an “accommodative” policy), the economy may get rolling too fast and inflation will spike too high. When the FOMC, in all its wisdom (and, I’m sure, a few tea leaves) decides that there is too much inflation on the horizon because the economy is picking up speed, they raise rates—they put on the brakes.

That is what they have been doing through all of 2018; this latest increase is the fourth, raising the Federal Funds rate to 2.5%.

What about mortgage rates?

But if the Fed just raised rates, why are mortgage rates going down?

Thank you for asking that excellent question. The answer is that the Fed has nothing to do with mortgage rates. Those are based almost entirely on what investors are paying for mortgages on any given day.

You may already know that most mortgages are ultimately sold to investors. Fannie Mae and Freddie Mac, two names that may be familiar, exist to buy loans from banks like Pinnacle. Lenders set their interest rates each day on what Fannie, Freddie and other investors are currently paying for loans. When the price of the loans goes up, rates come down.

A mortgage is most commonly a fixed-income investment. Because of this, it is sensitive to inflation. If investors think inflation is increasing, they tend to pay less for mortgages, or to sell the ones they already have. That makes the price of mortgages go down and rates go up.

When the Fed raises the Federal Funds rate, they are sending a signal to the market: “We’re paying attention to inflation and won’t let it get out of hand.” The investors heave a big sigh of institutional relief and continue buying mortgages.

What mortgage rates have been doing

We have been seeing mortgage rates settling slightly lower since November 13 of this year. The reason they’ve been dropping is that the price of mortgages (specifically the pooled mortgages, called Mortgage Backed Securities) has been steadily going up.

The green bars represent days when the price went up (lower rates). Red means the price went down (higher rates). The increase in the price of mortgages since November 13 represents a drop of about 3/8% in rate.

What to make of this

The message you should take away from this is that the Fed raising rates is not a bad thing for mortgage rates. It is, more often than not, a good thing.

Still, the one thing we can count on is change. Even though rates have been improving, there is no guarantee that they will continue this trend. There does come a time when investors want to take their profits off the table. When that happens, expect rates to go up, at least temporarily.

If you think a new home is in your future, now is a good time to start the process.

You may already be aware that some cities in California impose transfer taxes on top of the one charged in all counties. The county tax, which is $1.10 per $1,000 of transferred value, will remain the same, but some Northern California cities will see a big increase. The city transfer tax is commonly split between buyer and seller 50/50, but everyone should be aware of the changes, which will presumably take effect on January 1, 2019.

Here are the changes for Bay Area cities (if you are reading this in some other region, check with your friendly neighborhood title company):

Note that El Cerrito did not previously have a transfer tax. Now, buyers and sellers will have to deal with an additional cost of 1.2% of the purchase price. The median price among the 24 active listings in El Cerrito as of this writing is $799,475. This represents an additional $9,993 in cost to be shared between buyer and seller.

Mortgage lenders in particular need to be aware of this change; they are responsible for disclosing transfer taxes when they send their disclosures to their borrowers, regardless of who will pay them.

If you’ve been keeping an eye on mortgage rates, you are aware that they have been going up quite consistently. To get broad picture, you should know that mortgage rates respond directly to the price of Mortgage Backed Securities (MBS). These are the pools of mortgages purchased by investors like Fannie Mae and Freddie Mac. Investors buy and sell them on the open market, and their price fluctuates according to that market activity.

When there is more selling of the MBS, the price goes down. When the price of the MBS goes down, rates go up because lenders will receive a lower price for each loan they sell. They raise their rates so that they can earn the same gross margin on each loan they sell.

Here is what has happened to MBS since the beginning of the year. The green bars represent days when the price increased (lower rates). The red bars, the price went down (higher rates).

There have been extended periods when rates have not made any big moves–mid-June until late-August, for example.

Beginning on September 6, we have seen a significant decline in the price of MBS. Note that there are more redbars than green ones. The size of the bar indicates how much the price changed.

The heavy selling activity beginning on September 6 caused rates to increase rapidly by about .25%. Today (10/3/18), the MBS experienced a larger sell-off, causing them to drop in price by about .50. This means that you can expect mortgage rates today and tomorrow to be about .125% higher than they were at the beginning of the week. They are about .375% higher than they were at the beginning of September.

There is no sure way to predict what interest rates will be even in the near future. Just be aware that a rate a lender may have quoted you a few days ago will not be valid today unless they locked it for you at that time. You should also know that all lenders sell their loans in the same way, so this rate increase affects all, regardless of their size. If you have a loan pending and have not locked your rate, you should do so immediately.

We hope this slightly technical explanation is helpful. As always, we are happy to explain further. Just give us a call at 925-383-2846.

I was asked recently who has the best mortgage for people with “low credit scores.”

“Low credit score” is a nebulous term, so let’s see if we can narrow it down a bit.

A borrower’s FICO score is a three-digit number derived from data kept in each of the three credit repositories: Experian, Equifax and TransUnion. The FICO models (there are several of them) consider payment history, credit utilization, age of accounts and types of credit, among other factors. “Derogatory” entries include a history of late payments, collection accounts, over-limit credit cards and public record entries such as foreclosures, bankruptcies, liens and judgments.

Conventional loans (those that will ultimately be purchased by Fannie Mae or Freddie Mac) require a minimum score of 620. FHA loans, which are insured by the Department of Housing and Urban Development, will allow scores as low as 580 with a 3.5% down payment.

To have a score as low as 580 or 620, a consumer must have some combination of the following negative factors:

  • Recent history of late payments
  • Unpaid collection accounts
  • Public record items
  • High credit card balances

Each of these factors lowers a consumer’s credit score. Some of them, assuming they have been correctly reported, can’t be fixed quickly. Others, however, lend themselves to immediate remedy—and significant score improvement.

A word about “credit repair.” There are companies that promise to improve a consumer’s FICO score—for a fee. They claim that they can remove even those derogatory entries that are correct. They do this by disputing every negative item on the consumer’s credit report. Under the Fair Credit Reporting Act (FCRA), credit bureaus are required to investigate these disputes with the creditors and confirm their accuracy within 30 days. If they are unable to confirm them, they must delete them.

The credit repair company knows that some of the creditors reporting negative information will not respond to the credit bureau’s query within 30 days. In that case, the negative entry will magically disappear from the consumer’s credit report.

The problem with this is that while the derogatory entry may disappear, the creditor may report the same negative information to the credit bureaus at a later time. Furthermore, while the account is “in dispute,” it will be reported as such on the consumer’s credit report. Lenders know how credit repair companies operate, so they require that disputes be resolved. Removing a dispute (but not the negative entry) will cause the consumer’s score to go down.

Apart from trying to remove accurately reported negative items from one’s credit report through a sort of loophole in the law, there are some actions a low-FICO consumer can take to get an immediate—and often dramatic—improvement.

Collection accounts

If a consumer doesn’t make their payments on time (or doesn’t make payments at all), the creditor will assign the account to an internal department or third party to collect the debt. When they report the account as being in collection, the consumer’s credit score takes a beating. Not only is there a history of late payments, but the balance reported may be over the credit limit, with a past-due balance. A single account could cost 50 points on a consumer’s FICO score.

The first step is to contact the creditor or collection company to negotiate a settlement. I know, I know…these people are nasty and rude. They’ve been dunning you mercilessly for payment. They are threatening to sue you.

You have to talk to them. Be aware that bill collectors are really sales people. It’s the dark side of sales, but they earn a commission based on the money they collect. In most cases, they are willing to settle for a lesser amount than what they have reported to the credit bureaus. In many cases, the collection company has purchased the debt for pennies on the dollar, so everything they are able to collect over what they paid is profit to them.

When you speak with a collection agent, tell them you’d like to settle your account. They’ll give you a number, which will include accrued interest and late fees. Tell them you can’t pay that, but you’d like to offer this much for full settlement of the account. The bill collector will tell you they have to “talk to the manager.” They’ll put you on hold for a few minutes. When they come back on the line, they’ll either give you a higher number, or accept he offer you’ve made—but only if you agree to a “check by phone” right then.

Don’t do it.

You should not agree to give them any money without having a settlement from them in writing. The agreement—which can be in the form of an email or fax—should specify that they will accept the proposed amount in full settlement of the account. They should also agree to immediately report the account as settled. This won’t change the history of past-due payments, but the status will change from “collection account” to “paid collection. This will improve your score significantly.

Credit card balances

The FICO model refers to “credit utilization.” This means the balance on credit cards as a percentage of your credit limit. When you exceed about 30% of the credit limit, your score starts to suffer. A maxed-out card can cost you 20 points on your score. If you are over the limit, the impact could be 30 points.

Paying down credit card balances helps you in two ways. First, keeping your balance below 30% will improve your FICO score. Second, do you really want to keep paying 18% or more on those balances? It is a waste of your money.

Public record items

If someone sued you in small claims court and won, the court will enter a judgment against you. Your credit report will how the amount of the judgment, and possibly a lien, depending on the type of action. You’re going to have to settle it one way or another. After you settle, the judgment will still appear on your credit report, but the effect will not be as severe. Most lenders will require that judgments be satisfied before they will approve your loan.

The power of time

A low credit score is never permanent. The older a negative item gets, the less its effect on your credit score. A missed payment to Macy’s last month could cost you 25 points. A year from now, the cost could be just 10 points (assuming no other derogs). After two years, the effect is negligible.

Are there lenders who fund “sub-prime” loans for borrowers with very low credit scores? Yes. But they invariably charge very high rates and require larger down payments. It is a far better strategy in every respect to perform some rudimentary cleaning of your credit picture in ways that will genuinely improve your financial situation. If you have the funds available to deal with these items, you could be 30 days away from a much higher credit score—and far better terms or your financing.

Mortgage lenders use the borrower’s credit score to determine the rate they will get. Fannie Mae and Freddie Mac call this “risk-based pricing.” They publish a chart containing ranges of credit scores and loan-to-value ratios. Where the two axes intersect for a given borrower, the lender will find the adjustments to the interest rate. A borrower with a 620 score will pay about .75% more in rate for a conventional loan than will a buyer with a 740 score. The adjustments for FHA loans are equivalent, except that FHA allows a score as low as 580 for a loan with a 3.5% down payment.

We are always happy to provide advice and guidance for getting the best loan possible–even if your credit report shows some battle scars. You can always call us at 925-383-2846.